Investing and Opinion and Investing Column and Banking & Finance

Gold has been glittering next to other commodities

February 16, 2009

 "The gold of that land is excellent." (Genesis 2:12).

"All that he touched turned to gold." (The Legend of King Midas).

"There's gold in them thar hills!" (some random miner 49er).

Spot price of gold 10 years ago: $270 an ounce.

Spot price of gold today: $920 an ounce.

Gold has been an important part of man's history for as long as records have been kept. Not only have wars been fought over gold, but entire populations and races have been wiped out over attempts to secure more gold.

In every corner of the world, even totally isolated cultures seemed to place a higher value on gold than on almost any other substance around. Whether it was being used for jewelry, coins or simply hoarding, gold has been with us and we have valued it.

With the exception of a tiny period of time in the recent past—when gold ownership in the United States was outlawed (from 1931 until 1974) and when prices were at very low levels in the late 1990s—if you were alive at any time in history and had a pile of gold, you were rich.

There are a range of theories brought to us today by financial experts claiming to know what gold should be worth and why it moves as it does. You are probably familiar with the idea of gold serving as an inflation hedge. Some people suggest it should rise during times of political uncertainty.

Most people seem to agree, however, that gold has lost its long-term historical role as a true store of value. It doesn't pay a dividend. It can't invent the next great breakthrough. It will never be an employment source for millions of people around the world. And yet it has been one of the top-performing asset classes over the last 10 years.

Gold is sitting just 10-percent down from its all-time high of a year ago. How many other investments can you name that offer the same result?

For much of the second half of the 20th century, paper was in-paper assets like stocks, paper debt such as securitized bundles where no one was sure what the collateral was, and paper money like the U.S. dollar that has absolutely zero backing to it. This began to change in 2002 when commodities of all stripes began picking their heads up from 25-year trading ranges.

The truly amazing move in oil from $17 a barrel to $148 pretty much paints the picture of what was happening to hard assets all over the place. Gold went right along for the ride, but for some reason has been holding up much better than any other commodity over the last six months of brutal selling.

Interestingly, some stock indexes, including the S&P 500, have recently fallen below the last bear-market lows reached in 2002, but most commodities only fell back to areas that would be considered long-term break-out points. These points are now serving as support for prices, even though the losses have been severe since last year's highs.

While the prospects for general inflation can be debated all day, there is one thing of which I am certain. The interest rate our government pays to borrow money will go higher, possibly significantly higher over the next five years. These higher rates will reinforce a trend that has been growing slowly with investors over the last few years.

That trend is the idea that "backed by the full faith and credit of the United States Government," is not what it used to be. It may be that gold is now beginning to reassert itself into the role it was meant to play for man—the only true store of value we have ever known.
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Hauke is the CEO of Samex Capital Advisors, a locally based money manager. Views expressed here are the writer's. Hauke can be reached at 203-3365 or at keenan@samexcapital.com.

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